The Week Ahead Is All About Europe

The Chair of the Federal Reserve testifies before Congress on Tuesday and Wednesday.  Given the recent FOMC meeting and Yellen’s press conference, it is unlikely new ground will be broken. It is difficult for the market to price out a July hike more than it already has done. 

The August Fed funds futures contract, which offers the clearest read on the July 26-27 FOMC meeting, has two of a possible 25 bp hike (which is the same as a 12.5% chance). It is still early in the month, and there is not much data for this month.  What data there is has not been particularly encouraging.  Weekly jobless claims are relatively elevated.  The Philly Fed June survey showed deterioration of the labor market and the Empire State manufacturing survey’s diffusion index was at zero, suggesting that the number of firms increasing and decreasing their workforces was the same.

Instead of US-centric drivers, the week ahead is the most important of the year and dominated by events in Europe. Of course, the UK referendum on June 23 is the big event that has sent ripples through the global capital markets. It is still not clear how the murder of UK MP Jo Cox is going to impact the vote.  The first poll fully conducted after Cox’s death found a shift toward remaining in the EU.  

The Survation telephone poll on June 18-19 for the Mail found 45% favor remain and 42% want to leave. This is a reversal of Survation’s previous poll. Separately, a YouGov poll for the Sunday Times of which a 2/3 was conducted after Cox’s assassination, showed 44% want to remain part of the EU and 43% want to leave.  

The betting has edged in favor of remain and so have the event markets. The bookmakers have widened the odds of Brexit. At the peak last week, one had to wager 47 cents (to win $1) at PredictIt for Brexit. Now an exit wager can be made for 36 cents.  

Regardless of the outcome, participant must be prepared for a dramatic reaction in the markets. In the futures market, the net speculative positioning has changed very little over the last couple of weeks (short almost 37k futures contracts), but the size of the gross long and short positions have increased by roughly 30k contracts since the end of last month.   

There are nearly 400 local vote counting centers. The polls are open until 10:00 BST (5 pm EST). Although early market reaction is often faded, what may not be widely realized, but some large pools of capital are believed to be paying for their own private exit polls. This is important. This private information gives an obvious edge. A sense of the official results, even if not 100%, will likely be known between 3-5 am BST, which is late-Thursday night in NY,  where many market participants are expected to be manning their phones/computers. It is understood that the central banks will provide extra liquidity for the markets as needed.